Melrose in Talks Over $2.3 Billion Offer for CVC’s Elster

Elster, which has deployed more than 200 million meters, generated revenue of $1.9 billion in 2011. Source: Elster Group SE via Bloomberg

June 18 (Bloomberg) -- Melrose Plc is in talks to buy
Elster Group SE for $2.3 billion in cash to give the U.K.-based
investment company access to gas- and power-meters for advanced
electricity grids.

Elster has agreed to due diligence, and the backing of the
Essen, Germany-incorporated company’s board, as well as largest
shareholder CVC Capital Partners Ltd., is required for any firm
offer, the London-based company said. The $20.5-a-share proposal
is 25 percent higher than Elster’s close on June 15.

The pursuit of Elster follows Melrose’s unsuccessful battle
to acquire Charter International Plc, bought by Maryland-based
Colfax Corp. for $2.7 billion six months ago. Managed by former
Wassall Plc executives, Melrose targets under-performing
engineering and manufacturing companies and has investments
spanning plastic components, waste recycling as well as building
products.

“This would be Melrose’s ideal size,” Richard Paige, an
analyst at Barclays, said in a note. “Elster has a strong
market position which we expect to rise.”

Paige highlighted more assessment is needed to ascertain
whether Elster is the type of management turnaround opportunity
that Melrose specializes in, with the multiples not appearing
“cheap at first glance” and a deal structure imposing more
debt on the combined entity.

Potential Battle Ground

Melrose shares rose 0.4 percent to 384.1 pence in London
trading as of 8:59 a.m.

Elster, which has deployed more than 200 million meters,
generated revenue of $1.9 billion in 2011. Melrose’s offer is
equal to 8.42 times Elster’s earnings before interest, taxes,
depreciation and amortization, compared with a median multiple
of 12.28 times for electronic instrument deals in western Europe
over the past six years, according to data compiled by
Bloomberg.

Elster, with a market value of $1.85 billion, competes with
Itron Inc., Landis + Gyr AG of Switzerland, and Sensus USA Inc.
Techem AG, a German reader of utility meters, is owned by
Macquarie Bank Ltd.

The asset could be of interest to Siemens AG, ABB Ltd. as
well as private equity firms, Barclays analyst Amir Rozwadowski
wrote in a recent note. Global engineers are seeking expansion
in smart-grid technology, which helps regulate the amount of
power in a grid relative to demand, as nations upgrade
equipment. Itron, in an April 26, highlighted China as an
“excellent” market opportunity for water and heat metering.

Charter Battle

In the midst of the takeover battle surrounding Charter,
Melrose approached shareholders of Europe’s biggest welding-equipment maker about scuppering Colfax’s bid, the Financial
Times reported Sept. 24. While Charter’s board backed the Colfax
offer, its two biggest shareholders, Aviva Plc and Schroders
Plc, saw Melrose as the best manager for the company’s assets,
the newspaper reported.

“Melrose will only proceed with the transaction if it
meets Melrose’s acquisition criteria, including the terms on
which financing for the transaction can be raised,” the company
said in the statement. “This will include, but not be limited
to, the Melrose share price at the time of announcement.”